Tax Credits for Paid Leave Under the American Rescue Plan Act of 2021: Special Issues for Employers — Other Issues

 

Note: These FAQs address the tax credits available under the American Rescue Plan Act of 2021 (the "ARP") by employers with fewer than 500 employees and certain governmental employers without regard to the number of employees ("Eligible Employers") for qualified sick and family leave wages ("qualified leave wages") paid with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021, as well as the equivalent credits available for certain self-employed individuals. For information about the tax credits that may be claimed for qualified leave wages paid with respect to leave taken by employees prior to April 1, 2021, under the Families First Coronavirus Response Act ("FFCRA") and the COVID-related Tax Relief Act (the "Relief Act"), see Tax Credits for Paid Leave Under the Families First Coronavirus Response Act for Leave Prior to April 1, 2021 FAQs.

Although the requirement that Eligible Employers provide leave under the Emergency Paid Sick Leave Act ("EPSLA") and Emergency Family and Medical Leave Expansion Act ("Expanded FMLA") under the FFCRA does not apply after December 31, 2020, the tax credits under sections 3131 through 3133 of the Internal Revenue Code ("the Code") are available for qualified leave wages an Eligible Employer provides with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021, if the leave would have satisfied the requirements of the EPSLA and Expanded FMLA, as amended for purposes of the ARP.

Throughout these FAQs, the use of the word "work," unless otherwise noted, is inclusive of telework.

91. Can employees make salary reduction contributions from the amounts paid as qualified leave wages for their employer sponsored health plan, a 401(k) or other retirement plan, or any other benefits? (added June 11, 2021)

Sections 3131 and 3132 of the Code do not distinguish qualified leave wages from other wages an employee may receive from the employee's standpoint as a taxpayer; thus, the same rules that generally apply to an employee's regular wages (or compensation, for Railroad Retirement Tax Act purposes) would apply from the employee's standpoint. To the extent that an employee has a salary reduction agreement in place with the Eligible Employer, sections 3131 and 3132 of the Code do not include any provisions that explicitly prohibit taking salary reduction contributions for any plan from qualified sick leave wages or qualified family leave wages.

92. May an Eligible Employer increase the tax credit for its share of social security or Medicare tax by taking into account amounts contributed on a pretax basis to a cafeteria plan under section 125 of the Code? (added June 11, 2021)

No. An Eligible Employer may claim a tax credit under sections 3131 and 3132 of the Code only for those payments that are qualified leave wages, which must be either wages (as defined in section 3121(a) of the Code determined without regard to the exclusions from employment under section 3121(b)(1)-(22) of the Code) or compensation (as defined in section 3231(e) of the Code, determined without regard to the exclusions from compensation under section 3231(e)(1) of the Code) plus allocable qualified health plan expenses and certain collectively bargained contributions. Section 3133(a) of the Code increases this tax credit by the employer's share of social security and Medicare tax imposed on these qualified leave wages. However, amounts contributed on a pretax basis to a plan that meets the requirements of section 125 of the Code do not constitute wages or compensation. See Publication 15-B, Employers' Tax Guide to Fringe Benefits PDF, for more information. Accordingly, those amounts are not qualified leave wages and, if they are not allocable qualified health plan expenses, the employer may not claim a tax credit for those amounts under section 3131 or 3132 of the Code.

93. If the amount of paid sick leave or paid family leave an Eligible Employer pays to an employee is exempt from social security and Medicare taxes, can the Eligible Employer still claim the tax credit for paying that amount to the employee? (added June 11, 2021)

It depends. The tax credit for providing paid sick leave or paid family leave is allowed for qualified leave wages paid to employees. An amount must constitute wages (as defined in section 3121(a) of the Code for social security and Medicare tax purposes, determined without regard to the exclusions from employment under section 3121(b)(1)-(22) of the Code) or compensation (as defined in section 3231(e) of the Code, determined without regard to the exclusions under section 3231(e)(1) of the Code) in order to be qualified leave wages.

Example 1: A church in State X employs an ordained minister; the minister is a common law employee of the church. The church pays the ordained minister sick leave for periods during which he is unable to work because he is experiencing symptoms of COVID–19 and seeking a medical diagnosis. Although the minister's salary and parsonage allowance are not subject to social security and Medicare taxes because they are not considered as being provided for "employment" under section 3121(b)(8) of the Code, the payment is nonetheless a wage as defined in section 3121(a) of the Code when disregarding the exclusion in section 3121(b)(8) of the Code. Therefore, the paid sick leave is qualified leave wages for which the church may claim tax credits under section 3131 or section 3132 of the Code.

Example 2: A licensed real estate agent at Brokerage Firm Y receives substantially all of her payments for services directly related to home sales and performs services under a written contract providing that she will not be treated as an employee for federal tax purposes. Therefore, the licensed real estate agent at Brokerage Firm Y is treated as a statutory nonemployee under the Code. Brokerage Firm Y pays the agent sick leave for periods during which she is unable to work because she has been advised by a health care provider to self-quarantine due to concerns related to COVID-19. Amounts paid to the agent by Brokerage Firm Y do not constitute wages within the meaning of section 3121(a) of the Code. Therefore, the paid sick leave is not qualified leave wages for which Brokerage Firm Y may claim tax credits under section 3131 or section 3132 of the Code.

Example 3: Employer Z provides its employees with, and the employees make, pre-tax salary reduction contributions to or for, a qualified 401(k) plan, a fully-insured group health plan, a dependent care assistance program satisfying the requirements of section 129 of the Code, and qualified transportation benefits satisfying the requirements of section 132(f) of the Code. Employer Z also makes matching and nonelective contributions to the qualified 401(k) plan and pays for the remaining portion of the cost of maintaining the fully-insured group health plan.

Employer Z may treat as qualified leave wages the amounts its employees contribute as pre-tax salary reduction contributions to the qualified 401(k) plan because those amounts are wages within the meaning of section 3121(a) of the Code. Employer Z may also treat all amounts paid toward maintaining the fully-insured group health plan (including any employee pre-tax salary reduction contribution) as allocable qualified health plan expenses. See "Does the amount of qualified health plan expenses include both the portion of the cost paid by the Eligible Employer and the portion of the cost paid by the employee?"

Employer Z may not treat as qualified leave wages the amounts Employer Z contributes as matching or nonelective contributions to the qualified 401(k) plan, nor may it treat as qualified leave wages any employee pre-tax salary reduction contributions toward the dependent care assistance program or qualified transportation benefits. These amounts do not constitute wages within the meaning of section 3121(a) of the Code and are not allocable qualified health plan expenses or certain collectively bargained contributions; therefore, these amounts are not qualified leave wages under section 3131 or section 3132 of the Code.

94. How do Eligible Employers report the amount of qualified leave wages paid to employees? (added June 11, 2021)

Eligible Employers must report the amount of qualified leave wages paid to employees for paid leave that would have satisfied the requirements of the EPSLA or Expanded FMLA, as amended for purposes of the ARP, on Form W-2, Wage and Tax Statement PDF, either in Box 14, or in a statement provided with the Form W-2. For the 2021 Form W-2, Eligible Employers must report qualified leave wages paid in 2021.

For more information, including optional language that Eligible Employers may use in the Form W-2 instructions for employees, see Notice 2020-54 PDF.

95. Does an Eligible Employer need to report qualified leave wages in Box 14 (or a separate statement) of the Form W-2 if those amounts are not "wages" due to an exclusion from "employment" under section 3121(b) of the Code or "compensation" under section 3231(e)(1) of the Code? (added June 11, 2021)

Yes. Section 9642(e)(2) of the ARP reduces the qualified sick leave equivalent amount for which a self-employed individual may claim a tax credit to the extent that the sum of the qualified sick leave equivalent amount described in section 9642(c) of the ARP and any amounts described in section 3131(b)(1) of the Code exceeds the applicable thresholds under section 5102(a) of the EPSLA, as amended for purposes of the ARP. Similarly, section 9643(e)(2) of the ARP reduces the qualified family leave equivalent amount for which a self-employed individual may claim a tax credit to the extent that the sum of the qualified family leave amount described in section 9643(c) of the ARP and any amounts described in section 3132(b)(1) of the Code exceeds $12,000.

Sections 3131(b)(1) and 3132(b)(1) of the Code describe the amounts of qualified sick leave wages and qualified family wages taken into account for purposes of the employer payroll tax credits for paid sick leave and paid family leave, respectively. Qualified leave wages are wages (as defined in section 3121(a) of the Code determined without regard to the exclusions from employment under section 3121(b)(1)-(22) of the Code), and compensation (as defined in section 3231(e) of the Code, determined without regard to the exclusions from compensation under section 3231(e)(1) of the Code).

Therefore, Eligible Employers will determine the amount to report in Box 14 of the Form W-2, Wage and Tax Statement PDF without regard to the exclusions from employment under section 3121(b)(1)-(22) of the Code and without regard to the exclusions from compensation under section 3231(e)(1) of the Code.

96. Is an Eligible Employer that does not claim the tax credits for qualified leave wages required to report the sick leave and family leave wages paid to employees on Form W-2, either in Box 14 or in a statement provided with the Form W-2? (added June 11, 2021)

No. If an Eligible Employer does not claim the tax credits for qualified leave wages, it will be treated as having elected under sections 3131(f)(4) and 3132(f)(4) of the Code not to take those qualified leave wages into account for purposes of sections 3131 and 3132 of the Code. Accordingly, the sick leave wages and family leave wages it pays to employees do not have to be reported to employees in Box 14 of Form W-2, Wage and Tax Statement PDF, or in a statement provided with Form W-2.

97. Are United States governmental employers that are not permitted under the ARP to claim the tax credits for qualified leave wages required to report sick leave and family leave wages paid to employees on Form W-2, either in Box 14 or in a statement provided with the Form W-2?

No. The government of the United States or any agency or instrumentality thereof (not including any organization described in section 501(c)(1) and exempt from tax under section 501(a) of the Code) (federal governmental employers) are not permitted to claim the tax credits under sections 3131 and 3132 of the Code. Because federal governmental employers cannot claim the tax credits, any sick leave wages and family leave wages paid to employees are not considered qualified leave wages under the ARP. Therefore, those wages do not have to be reported to employees in Box 14 of Form W-2, Wage and Tax Statement PDF, or in a statement provided with Form W-2.

This rule does not apply to the government of any State or political subdivision thereof, any agency or instrumentality of those governments, Tribal governments, or federal government employers described in section 501(c)(1) and exempt from tax under section 501(a) of the Code that are Eligible Employers permitted to claim the tax credits for sick leave wages and family leave wages paid to employees.

98. Is an Eligible Employer that did not claim the tax credits for qualified leave wages but reported sick leave or family leave wages in 2020 in Box 14 of Form W-2 or in a separate statement required to furnish a Form W-2c? (added June 11, 2021)

Yes. If an Eligible Employer that did not claim the tax credits for qualified leave wages reported the sick leave wages or family leave wages paid to employees in Box 14 of Form W-2, Wage and Tax Statement PDF, or in a statement provided with Form W-2 PDF, the Eligible Employer must either furnish a Form W-2c, Corrected Wage and Tax Statement PDF or provide a corrected statement to employees correcting the erroneous reporting. However, the Eligible Employer should not file Form W-2c with the SSA solely to correct the amount in Box 14.

99. Should Eligible Employers withhold federal employment taxes on qualified leave wages paid to employees? (added June 11, 2021)

Yes. Qualified leave wages are wages subject to withholding of federal income tax and the employees' share of social security and Medicare taxes, unless those wages or compensation are described in the exclusions from employment under section 3121(b)(1)-(22) or in the exclusions from compensation under section 3231(e)(1) of the Code, respectively. Qualified leave wages are also considered wages for purposes of other benefits that the Eligible Employer provides, such as contributions to 401(k) plans.

100. Is a tax-exempt employer eligible for the tax credit as an Eligible Employer? (added June 11, 2021)

Yes. Sections 3131 and 3132 of the Code entitle Eligible Employers that pay qualified sick leave wages and qualified family leave wages to refundable tax credits. Qualified sick leave wages and qualified family leave wages are those wages for paid sick leave and paid family leave that are paid for leave that would have satisfied the requirements of the EPSLA or Expanded FMLA, as amended for purposes of the ARP. Tax-exempt organizations that provide that paid sick leave or paid family leave may claim the tax credits.

101. Can an employer choose not to claim the tax credits? (added June 11, 2021)

Yes. An employer is not required to claim the tax credits even if it is an Eligible Employer. An Eligible Employer that does not claim the tax credits for qualified leave wages under sections 3131 or 3132 of the Code is treated as having elected under sections 3131(f)(4) and 3132(f)(4) of the Code not to take those qualified leave wages into account for purposes of sections 3131 and 3132 of the Code.

102. Can an Eligible Employer receive tax credits for providing paid leave that an employee is entitled to under the Eligible Employer's policy? (added June 11, 2021)

Yes, provided that the leave would have satisfied the requirements of the EPSLA or Expanded FMLA, as amended for purposes of ARP. That is, sections 3131(c) and 3132(c) of the Code define "qualified sick leave wages" and "qualified family leave wages" as wages or compensation paid by an Eligible Employer which would have satisfied the requirements of the EPSLA, or Expanded FMLA, as amended for purposes of the ARP. Therefore, if an Eligible Employer pays wages or compensation for leave pursuant to its own policy that satisfies the requirements of the EPSLA or Expanded FMLA, as amended for purposes of the ARP, the Eligible Employer is entitled to claim tax credits under the ARP for those wages.

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